FINRA issued EDI Financial, Inc. (EDI), a Texas brokerage firm, a hefty $100,000 fine for pushing customers to purchase numerous private placements despite the danger of over concentrating their portfolios and putting investors at great risk.
Investing in private securities is risky business, especially when the firm selling you the investment is not taking the necessary steps to ensure that the private placements are suitable for a specific client, as EDI did. Private securities are investments offered to a small number of select investors rather than the public at large. They are not registered with the Securities and Exchange Commission (“SEC”) and are often the key source of capital for smaller businesses. Companies that issues private placement securities are not required to file financial reports, and their financial statements are not audited as closely as publicly traded companies. Consequently, investors are often unable to see how a company is performing, creating a dodgier investment environment.
Private Placements typically offer larger commissions so it’s easy to understand why brokers are so incentivized to sell them. Thus, EDI selling private placements before performing its due diligence on a customer’s portfolios to determine if the investment was an adequate fit violated the firm’s suitability obligations for the solicitation and sale of private placements.
As if private placements weren’t risky enough, EDI lacked sufficient written guidance for determining whether and how much to recommend that a particular customer invest in a private placement. Prior to recommending an investment, a firm must have reasonable grounds for believing that the investment is suitable for the customer, given the customer’s financial situation, including the customer’s other investments. Due to the risk and relative illiquidity of private placements, it remains unsuitable for a customer’s assets to be overly concentrated in private placements.
However, EDI instructed multiple customers to invest in private placements, creating a heightened risk that those customers’ assets would be overly concentrated. The firm lacked adequate systems and procedures for monitoring the proportion of each customer’s assets that was invested in private placements. Thus, the firm had no way of determining whether the customer’s assets were overly concentrated in private placements, and EDI representatives continued pushing the private placements on investors in order to retain the higher commissions.
This lack of supervisory programs puts EDI’s customers at great risk as firm representatives are understandably selling private placements to customers for the heightened commissions. FINRA requires that firms implement security programs to be sure a customer places his money in appropriate investments given the customer’s portfolio and investment goals. EDI’s lack of security programs caused the firm to overlook potential red flags in customer accounts.
Industry participants must be mindful of all customer accounts and the transactions they suggest to investors. FINRA requires its members to develop and implement measures that help protect all customers from broad oversight. If EDI was failing to regulate customer portfolios and continued encouraging the sale of private placements, it seems safe to assume that they are not monitoring or taking great care of other, potentially smaller, customers’ needs. EDI was ultimately fined $100,000 for its failure to perform adequate due diligence on private placements and customer portfolios and lacking the supervisory systems to ensure customer accounts were handled properly.
If you believe that you have suffered losses due to an incompetent financial advisor or brokerage firm, contact the attorneys at Investor Defense Law LLP at no charge and find out whether you have a claim.
Investor Defense Law LLP is a law firm dedicated to helping investors in California, Georgia, and Washington recover losses caused by stockbrokers, financial advisers, or investment firms. To learn more, contact an investment fraud attorney at 800.487.4660.